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Stochastic efficiency analysis with risk aversion bounds: a simplified approach
Author(s) -
Hardaker J. Brian,
Richardson James W.,
Lien Gudbrand,
Schumann Keith D.
Publication year - 2004
Publication title -
australian journal of agricultural and resource economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.683
H-Index - 49
eISSN - 1467-8489
pISSN - 1364-985X
DOI - 10.1111/j.1467-8489.2004.00239.x
Subject(s) - stochastic dominance , pairwise comparison , range (aeronautics) , risk aversion (psychology) , simple (philosophy) , set (abstract data type) , mathematical optimization , mathematics , function (biology) , computer science , econometrics , mathematical economics , statistics , expected utility hypothesis , engineering , aerospace engineering , philosophy , epistemology , evolutionary biology , biology , programming language
A method of stochastic dominance analysis with respect to a function (SDRF) is described and illustrated. The method, called stochastic efficiency with respect to a function (SERF), orders a set of risky alternatives in terms of certainty equivalents for a specified range of attitudes to risk. It can be applied for conforming utility functions with risk attitudes defined by corresponding ranges of absolute, relative or partial risk aversion coefficients. Unlike conventional SDRF, SERF involves comparing each alternative with all the other alternatives simultaneously, not pairwise, and hence can produce a smaller efficient set than that found by simple pairwise SDRF over the same range of risk attitudes. Moreover, the method can be implemented in a simple spreadsheet with no special software needed.